For countless businesses, the significant disruptions stemming from the COVID-19 pandemic have caused unprecedented financial challenges this year. Therefore, as 2020 comes to an end and businesses start preparing for tax season, it is crucial to seek opportunities to minimize taxes. The right tax strategy can help businesses save money and boost cash flow, thereby offsetting losses sustained over the past several months and laying the foundation for a strong start to 2021. Fortunately, the federal tax code provides several ways for businesses to reduce their tax burdens, and the government has offered additional relief this year through the Coronavirus Aid, Relief and Economic Security (CARES) Act.
As you review your business records in preparation for tax season, ensure that you have considered the following opportunities for tax savings.
Tax relief under the CARES Act
Enacted in March 2020, the CARES Act is a $2 trillion stimulus package designed to help individuals and businesses alike financially weather the pandemic. Businesses should work with their tax advisors to determine whether they may be able to take advantage of the following opportunities under the CARES Act:
- Claim bonus depreciation for qualified improvement property (QIP). Defined as any improvements that a taxpayer makes to the interior portions of nonresidential real property after the building is first placed into service, QIP may include the installation or replacement of mechanical, electrical or plumbing systems, interior doors, ceilings, and more. QIP was added to the tax code under the PATH Act of 2015, but was originally assigned a 39-year depreciable life due to a drafting error. This rendered it ineligible for bonus depreciation, which is only available for assets with a recovery period of 20 years or less. Fortunately for taxpayers, the CARES Act corrected the error, changing the depreciable life for QIP to 15 years and thus making it eligible for bonus depreciation. Therefore, through 2022, building owners may now depreciate up to 100 percent of the cost of QIP during its first year in service—representing a powerful opportunity to unlock more substantial and immediate depreciation deductions and quickly boost cash flow. Businesses may also amend previous tax returns to take advantage of this provision.
- Offset taxable income with net operating losses (NOLs). Another provision of the CARES Act has allowed businesses that had NOLs in 2018, 2019, or 2020 to carry back the losses for up to five years, without having to worry about the usual NOL limit of 80 percent of taxable income. As a result, businesses may be able to fully offset their taxable income with NOLs and boost cash flow by claiming refunds from prior years when they paid federal income tax. To take advantage of this provision, businesses may consider seeking ways to generate NOLs, such as by securing Cost Segregation studies and claiming overlooked tax credits like the Research and Development (R&D) Tax Credit or the §179D deduction. Read on to learn more about these strategies.
For commercial building owners who have installed qualifying energy efficiency measures, the clock is ticking to take advantage of the §179D deduction, which is currently available for projects completed between January 1, 2018 and December 31, 2020 but is set to expire at the end of the year. This valuable incentive—which is also available to architects, engineers, and other “primary designers” who design energy efficiency measures for government-owned buildings—is worth up to $1.80 per square foot. Specifically, it is worth up to $0.60 per square foot for improvements to a building’s interior lighting systems, $0.60 per square foot for improvements to the HVAC and hot water systems, and $0.60 per square foot for improvements to the building envelope. To qualify for the §179D deduction, energy efficiency measures must meet or exceed the standards of ASHRAE 90.1-2007, and projects must be certified with IRS-approved software by a third party, such as Capital Review Group (CRG).
With no clear plans from Congress to renew the §179D deduction at this time, taxpayers should act promptly to review their project records and determine whether they may qualify. At CRG, we have helped both commercial building owners and primary designers capture six- or seven-figure tax savings through this incentive, such as one architecture firm that recently received a §179D deduction of $160,000.
Cost Segregation offers another way for commercial building owners to significantly reduce their tax burdens. By simply reclassifying certain assets from real property (which is depreciated over 39 years) to personal property (which is depreciated over 5, 7, or 15 years), the IRS-approved strategy of Cost Segregation allows taxpayers to boost cash flow through accelerated depreciation deductions. Cost Segregation may be particularly valuable after the CARES Act as it serves as a tool for identifying QIP, thereby helping building owners take advantage of bonus depreciation.
To ensure compliance with IRS regulations and receive the greatest financial benefit available, Cost Segregation studies should be conducted by tax professionals with expertise in engineering and commercial property, such as the team at CRG. We routinely help commercial buildings owners maximize their tax savings with this strategy, including one of our recent clients: a hotel that saved over $1.2 million in taxes through Cost Segregation alone.
Research and Development (R&D) Tax Credit
As one of the most lucrative incentives in the tax code, the federal R&D Credit saves large corporations billions of dollars each year, but is often overlooked by smaller and mid-sized businesses. Contrary to common misconceptions, the R&D Credit is available to businesses of all sizes and in a wide variety of industries, ranging from architecture and engineering to construction and manufacturing. To qualify for the credit, businesses must engage in qualified research activities that seek to create a new or improved product, process, or software. Most states also offer their own R&D Credits, which may be even more generous than the federal version. For example, one CRG client, a mid-sized engineering firm based in Phoenix, was able to save up to $152,000 through the federal R&D Credit and up to $234,000 through the Arizona R&D Credit.
As tax season quickly approaches, now is the time for businesses of all sizes to work with their CPAs and other tax/financial professionals to minimize taxation and boost cash flow. At CRG, we stay up to date on the latest changes affecting taxpayers and can help businesses and commercial building owners capture all savings opportunities available to them. As a firm run by CPAs, we also partner with CPAs to maximize financial benefit for their business clients. Contact us today to schedule a consultation!